In a setback to the PM Narendra Modi govt, gas utility GAIL and refiner CPCL have expressed their inability to obey Oil Ministry order to deduct USD 115 million from the amount due to Reliance Industries (RIL)to make up for the additional profit from the flagging KG-D6 block.

Oil Minister Dharmendra Pradhan had last month told the Parliament that his Ministry has disallowed Reliance Industries from recovering USD 2.376 billion invested to develop offshore Krishna Godavari gas fields as output has fallen drastically and was way below the promised volumes in past four years.

Due to this cost disallowance, the Ministry calculated that the government should have got an additional profit share of USD 115.263 million. To recover this, it directed GAIL and Chennai Petroleum Corp Ltd (CPCL) to deduct this amount due to RIL, he had stated.

However, both companies have expressed their inability to do so as no amount was pending against crude oil and gas they purchased from RIL, sources said.

CPCL stated that it bought crude oil produced from KG-D6 block from March 2009 to April 2014 but lost out on a tender floated by RIL from supplies thereafter. RIL’s Jamnagar refineries quoted better price and terms to bag the supplies.

So, there was no amount due from which any deduction can be made, it wrote to the Ministry.

GAIL told the Ministry it was allocated 2.594 million standard cubic meters per day of gas from KG-D6 block for making LPG but due to decline in gas production, supplies were reduced to zero in June 2013. Also, the contract expired on March 31 this year.

In the absence of gas supplies from KG-D6, there is no remittance by GAIL to RIL and hence no amount can be deducted, the state-owned firm told the Ministry.

Sources said the options before the Ministry now include disputing the sale of crude oil from KG-D6 fields to Jamnagar refineries as related party transactions and getting CPCL to buy the oil again.

Another option could be to ask fertilizer plants, which get almost all of the present output of 13 mmscmd from KG-D6, to deduct USD 115 million from amount due against supplies.

While the first option may take some time before it can be actually accomplished, the second option may be difficult to implement, they said.

Pradhan had in a written reply to a question in Lok Sabha on July 14 stated that the government has disallowed USD 579 million additional cost for output missing the targets.

With this, the total penalty on RIL for missing the target in four fiscal years beginning April 1, 2010 now stands at a cumulative USD 2.376 billion.

Disallowing costs will result in government’s profit share rising by USD 195 million from 2010-11 to 2013-14, he had said, adding that of this, USD 115 million is being sought to be recovered through CPCL and GAIL.

The Production Sharing Contract (PSC) allows RIL and its partners BP Plc and Niko Resources to deduct all capital and operating expenses from the sale of gas before sharing profit with the government.

Gas output from the Dhirubhai-1 and 3 gas field in the eastern offshore KG-D6 block was supposed to be 80 mmscmd but actual production was only 35.33 mmscmd in 2011-12, 20.88 mmscmd in 2012-13 and 9.77 mmscmd in 2013-14.

This year the output has been only 8.05 mmscmd.

Pradhan told the Lok Sabha that his ministry on July 10 issued a notice disallowing USD 579 million in cost for output lagging targets in 2013-14.

The government had previously issued a notice to RIL disallowing a total of USD 1.797 billion in costs for falling short of production during 2010-11 (USD 457 million), 2011-12 (USD 548 million) and 2012-13 (USD 792 million).

Pradhan stated that the issue is currently under arbitration.

“The Ministry of Petroleum and Natural Gas has also raised a claim of additional profit petroleum to the tune of USD 115 million to be paid by the contractor, on account of disallowance of cumulative contract costs of USD 1.797 billion, till 2012-13,” he said.

After including cost disallowance in 2013-14, the total additional profit petroleum claimed from RIL comes to USD 195 million, he said.

“GAIL and Chennai Petroleum (who buy oil and gas produced from KG-D6 block) have been directed to remit the sale proceed of crude oil/condensate/natural gas from KG-DWN-98/3 (KG-D6) block which falls due immediately into the Government account so as to recover an amount of USD 115,263,612 at the rate of 50 per cent by each company and deposit the same with the government,” he had said.

The Minister stated that RIL had put up production facilities to produce 80 mmscmd of gas but “has failed to adhere to the approved field development plan in terms of drilling and putting on stream the required number of wells.”

His ministry and its technical arm DGH blames non- drilling of committed wells for the production lagging targets while RIL and its partners say unexpected geological complexities like sand and water ingress led to output fall.